01/16/2014

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The wine industry is transitioning to a period of growth for the first time in several years, according to a report released Thursday by Silicon Valley Bank.

Sales of fine wines priced $20 and up are expected to grow by 6 to 10 percent over the next year, said Rob McMillan, executive vice president and founder of Silicon Valley Bank's wine division.

"That's the first increase we've put in place for three years now," McMillan said Thursday during an online chat about the state of the industry.

For several years, the bank has accurately predicted declining sales for that segment, but that outlook is changing, he said.

Wine prices will remain stable because wineries are not passing on recent higher costs for grapes and bulk wine to consumers, the report said. However, that reluctance to raise prices will cut into winery profits this year, the bank forecast.

"There won't be a shortage of good wines, so that's a victory for the consumer," McMillan said.

After two consecutive enormous harvests that broke or nearly broke records, grape prices softened a bit on the spot market toward the end of the 2013 harvest, said Glenn Proctor, partner in Ciatti Company, a wine and grape brokerage.

"There's a little bit of a hangover from last year's crop," Proctor said.

With the extra grapes, wineries are expanding by starting new lines, Proctor said.

Even so, the financial picture at wineries hasn't been outstanding. Pre-tax profits fell to 5.4 percent last year, down from 6.9 percent in 2012, according to Silicon Valley Bank research. Gross margins fell to 52.6 percent last year, down from 53.4 percent in 2012.

Prices will remain stable in part because of changes to who is buying wine.

The industry may face headwinds as Baby Boomers, who have long been willing to open their wallets for good wine, see their purchasing power decline, the report said. Drinkers aged 50 to 60 buy about half the fine wine in the United States.

But while 11,500 Boomers retire every day, they're being replaced by 14,000 newly minted drinkers who reach the legal drinking age and don't have substantial incomes, McMillan said. And younger consumers are being trained to believe luxury purchases should come with a discount, and that foreign wines are as good or better than domestic wines.

"They can't buy wine like Boomers but they do show up in the research as being willing to spend more of their hard-earned income on wine versus other cohorts," McMillan said. "The generational change is a short-term negative, but as Millennials gain wealth and hit their 30s, it will be a longer-term positive if we can teach them to drink less foreign wine."

Meanwhile, winery owners who want to pass the family business on to a second generation are under less pressure to sell, unlike two years ago when there were more distressed winery sales, said Mario Zepponi, co-owner and partner at Zepponi - Co., a wine industry mergers and acquisitions firm.

Even after the recent bumper crops, the largest wineries have been buying vineyards to secure grape supply in markets like Sonoma County, where most of the suitable vineyard land has already been developed and future expansion is limited.

Expansion into Oregon and Washington was the story of 2013, when companies like Jackson Family Wines, E-J Gallo and Foley Family Wines made substantial purchases there, Zepponi said.

"They're not just buying to be at critical mass," Zepponi said. "They have to feed brands and price points."

Direct sales of wine to consumers surpassed $1.5 billion for the first time in history, according to the bank, which cited data from ShipCompliant and Wines - Vines.

Wineries are increasingly attempting to skip the middleman and sell straight to consumers through ecommerce channels, said Paul Mabray, chief strategy officer at Vintank, a Napa consulting firm. For example, Duckhorn Vineyards is looking for a vice president of direct-to-consumer sales, and is one of nearly a dozen wineries hiring for that new type of role.

The wine industry is transitioning to a period of growth for the first time in several years, according to a report released Thursday by Silicon Valley Bank.

Sales of fine wines priced $20 and up are expected to grow by 6 to 10 percent over the next year, said Rob McMillan, executive vice president and founder of Silicon Valley Bank's wine division.

"That's the first increase we've put in place for three years now," McMillan said Thursday during an online chat about the state of the industry.

For several years, the bank has accurately predicted declining sales for that segment, but that outlook is changing, he said.

Wine prices will remain stable because wineries are not passing on recent higher costs for grapes and bulk wine to consumers, the report said. However, that reluctance to raise prices will cut into winery profits this year, the bank forecast.

"There won't be a shortage of good wines, so that's a victory for the consumer," McMillan said.

After two consecutive enormous harvests that broke or nearly broke records, grape prices softened a bit on the spot market toward the end of the 2013 harvest, said Glenn Proctor, partner in Ciatti Company, a wine and grape brokerage.

"There's a little bit of a hangover from last year's crop," Proctor said.

With the extra grapes, wineries are expanding by starting new lines, Proctor said.

Even so, the financial picture at wineries hasn't been outstanding. Pre-tax profits fell to 5.4 percent last year, down from 6.9 percent in 2012, according to Silicon Valley Bank research. Gross margins fell to 52.6 percent last year, down from 53.4 percent in 2012.

Prices will remain stable in part because of changes to who is buying wine.

The industry may face headwinds as Baby Boomers, who have long been willing to open their wallets for good wine, see their purchasing power decline, the report said. Drinkers aged 50 to 60 buy about half the fine wine in the United States.

But while 11,500 Boomers retire every day, they're being replaced by 14,000 newly minted drinkers who reach the legal drinking age and don't have substantial incomes, McMillan said. And younger consumers are being trained to believe luxury purchases should come with a discount, and that foreign wines are as good or better than domestic wines.

"They can't buy wine like Boomers but they do show up in the research as being willing to spend more of their hard-earned income on wine versus other cohorts," McMillan said. "The generational change is a short-term negative, but as Millennials gain wealth and hit their 30s, it will be a longer-term positive if we can teach them to drink less foreign wine."

Meanwhile, winery owners who want to pass the family business on to a second generation are under less pressure to sell, unlike two years ago when there were more distressed winery sales, said Mario Zepponi, co-owner and partner at Zepponi - Co., a wine industry mergers and acquisitions firm.

Even after the recent bumper crops, the largest wineries have been buying vineyards to secure grape supply in markets like Sonoma County, where most of the suitable vineyard land has already been developed and future expansion is limited.

Expansion into Oregon and Washington was the story of 2013, when companies like Jackson Family Wines, E-J Gallo and Foley Family Wines made substantial purchases there, Zepponi said.

"They're not just buying to be at critical mass," Zepponi said. "They have to feed brands and price points."

Direct sales of wine to consumers surpassed $1.5 billion for the first time in history, according to the bank, which cited data from ShipCompliant and Wines - Vines.

Wineries are increasingly attempting to skip the middleman and sell straight to consumers through ecommerce channels, said Paul Mabray, chief strategy officer at Vintank, a Napa consulting firm. For example, Duckhorn Vineyards is looking for a vice president of direct-to-consumer sales, and is one of nearly a dozen wineries hiring for that new type of role.